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Inflation targeting and financial market volatility

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  • Roisin O'sullivan
  • Marc Tomljanovich

Abstract

We construct an inflation-targeting index for a group of seven Organization for Economic Co-operation and Development (OECD) countries that ranks countries according to the key features of formal inflation targeting regimes. The relationship between this index and bond markets is empirically examined to investigate whether inflation targeting reduces the mean of the conditional volatility of the difference between actual yields and those predicted by the expectations hypothesis. We find that the adoption of a more stringent inflation-targeting regime is generally associated with a statistically significant drop in conditional volatility, suggesting that inflation targeting reduces noise in bond markets.

Suggested Citation

  • Roisin O'sullivan & Marc Tomljanovich, 2012. "Inflation targeting and financial market volatility," Applied Financial Economics, Taylor & Francis Journals, vol. 22(9), pages 749-762, May.
    • Handle: RePEc:taf:apfiec:v:22:y:2012:i:9:p:749-762
    DOI: 10.1080/09603107.2011.625643
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    References listed on IDEAS

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    1. Alicia García Herrero & Pedro del Río, 2003. "Financial stability and the design of monetary policy," Working Papers 0315, Banco de España.
    2. J. De Haan & F. Amtenbrink & S.C.W. Eijffinger, 1999. "Accountability of central banks: aspects and quantification," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 52(209), pages 169-193.
    3. Lorenzo Bini-Smaghi & Daniel Gros, 2001. "Is the ECB Sufficiently Accountable and Transparent?," Economics Working Papers 007, European Network of Economic Policy Research Institutes.
    4. Edwin M. Truman, 2003. "Inflation Targeting in the World Economy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 346, April.
    5. Miss Eva Gutierrez, 2003. "Inflation Performance and Constitutional Central Bank Independence: Evidence From Latin America and the Caribbean," IMF Working Papers 2003/053, International Monetary Fund.
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    Cited by:

    1. Leonardo Quero Virla, 2023. "An empirical characterization of volatility in the German stock market," SN Business & Economics, Springer, vol. 3(7), pages 1-19, July.
    2. Goran Petrevski, 2023. "Macroeconomic Effects of Inflation Targeting: A Survey of the Empirical Literature," Papers 2305.17474, arXiv.org.

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